Public Storage — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts below are in millions unless noted. Public Storage is a self-storage REIT with 2,500 U.S. facilities and equity interests in Shurgard and PS Business Parks.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $709.3 | $711.0 | $1,425.4 | $1,400.0 |
| Net income | $315.8 | $371.5 | $682.9 | $739.1 |
| Net income allocable to common shareholders | $246.1 | $306.4 | $559.3 | $608.2 |
| Diluted EPS | $1.41 | $1.76 | $3.20 | $3.49 |
| FFO per diluted share (non-GAAP) | $2.28 | $2.57 | $4.90 | $5.09 |
| Core FFO per diluted share (non-GAAP) | $2.46 | $2.64 | $5.04 | $5.18 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $1,002.1 | $1,015.2 |
- Q2 revenue decreased 0.2% year over year; first-half revenue increased 1.8%. Q2 common diluted EPS fell 19.9%; first-half EPS fell 8.3%.
- Self-storage NOI was $450.7 million in Q2, down 4.8%, and $917.0 million in the first half, down 1.4%. Same Store NOI declined 6.8% and 3.4%, respectively. Same Store NOI margin was 69.3% in Q2 versus 72.1% a year earlier; first-half margin was 69.9% versus 71.7%.
- At June 30, cash and equivalents were $1,268.5; total assets $12,358.1; total liabilities $3,347.9; and total equity $9,010.2. Notes payable were $2,457.9 book value ($2,471.8 principal). The $500 million revolving credit facility had no borrowings and $480.7 million available after letters of credit.
- First-half investing cash outflow was $424.8, including $253.3 for acquisitions and $188.6 for development and maintenance capital expenditures. Financing cash inflow was $282.2. Cash and equivalents rose from $409.7 at year-end 2019.
- Common distributions were $2.00 per share for Q2 and $4.00 per share for the first half. On August 3, the Board declared a further $2.00 quarterly common dividend, payable in September.
Material changes and unusual items
- COVID-19 and economic disruption weighed on same-store revenue, collections-related fees, move-in pricing, and operating costs. Same Store revenue fell 3.0% in Q2, with rental income down 1.8% and late charges and administrative fees down 31.8%.
- Same Store realized rent per occupied square foot declined 2.0% in Q2; rent charged to new tenants was 13.9% lower year over year. Average occupancy nevertheless edged up to 94.2% from 94.0%.
- Same Store operating costs rose 6.7% in Q2, including higher property-manager payroll and marketing expense. Payroll included a temporary wage and paid-time-off increase that ended June 30.
- Foreign-exchange losses were $19.3 million in Q2 and $10.4 million in the first half, principally related to Euro-denominated debt; the Q2 loss compared with a $5.2 million loss in Q2 2019. Depreciation and amortization rose 8.5% in Q2 and 9.9% in the first half.
- Public Storage issued $565 million of Series L preferred shares at a 4.625% coupon in June. It called $495 million of Series V preferred shares for redemption; the shares were redeemed July 10. The June 30 balance sheet classified the called amount as a liability.
- Acquired and newly developed facilities helped offset same-store weakness. The company acquired 15 facilities for $253.3 million in the first half and opened 0.5 million square feet of developed or expanded space. It wrote off $3.2 million of costs for cancelled early-stage projects.
Outlook, risks and contingencies
- Management expects same-store revenue in the second half of 2020 to decline year over year at a faster rate than Q2, and says the timing of a return to revenue growth is uncertain. It cited some encouraging demand indicators and had begun cautiously restoring modest existing-tenant rate increases.
- Management warned that the pandemic’s duration and economic effects are uncertain and may continue to harm demand, rental rates, collections, occupancy, development schedules, and access to capital. Bad-debt losses could rise, including as enhanced unemployment benefits expire.
- Management estimated approximately $1.9 billion of capital resources for the next year against $931.1 million of identified needs. Identified needs included $402.8 million of remaining development-pipeline spending and the $495 million Series V redemption. Substantial debt principal maturities begin in 2022.
- The development and expansion pipeline comprised 39 projects, with an estimated total cost of $556.2 million; completion may be delayed or projects cancelled. Construction commitments were $78.2 million. Five facilities totaling $33.3 million were acquired or under contract after quarter-end.
- Additional risks include competition from new storage supply, higher property taxes (including a potential California property-tax ballot measure), foreign-currency movements, and possible changes in customer move-out patterns. The company reported no material off-balance-sheet arrangements and considered material loss from pending legal proceedings remote.
Investor verification priorities
- Track same-store rent, move-in pricing, occupancy, late-fee collections, and whether management’s second-half revenue outlook changes.
- Assess whether operating-cost increases, especially payroll, marketing, and property taxes, continue to outpace revenue.
- Review cash use, dividend coverage, the Series V redemption, debt maturities, and funding for the development pipeline and acquisitions.
- Monitor pandemic-related collection and move-out trends, project delays or cancellations, and the potential California property-tax initiative.
- Reconcile GAAP earnings with FFO and Core FFO, which are non-GAAP measures, and review foreign-exchange effects on earnings and Euro debt.